One of the first decisions when you start working for yourself is whether to be a sole trader or to set up a limited company. There is no single right answer. This guide explains the differences in plain English. It is general information, so ask an accountant to run the numbers for your situation.
The basics
- Sole trader: you and the business are the same legal person. You keep the profit and pay tax on it through Self Assessment.
- Limited company: the company is a separate legal entity. It owns the income and pays corporation tax, and you take money out as salary, dividends or both.
Tax
A sole trader pays income tax and Class 4 National Insurance on all the profit, whether or not they take it out. A company pays corporation tax on its profit (19% on profits up to £50,000 and 25% above £250,000, with a sliding scale in between). You then pay personal tax on the salary and dividends you take. Which route costs less depends on your profit, so model it before you decide.
Liability
A sole trader is personally responsible for the business’s debts. A limited company limits your personal liability to what you have invested in it, though directors still have legal duties and can be personally liable in some situations, such as personal guarantees.
Admin and cost
- Sole trader: register with HMRC, keep records, file a yearly Self Assessment return (or send quarterly updates under Making Tax Digital if it applies to you).
- Limited company: register with Companies House, file annual accounts and a confirmation statement, file a corporation tax return, keep company records and often pay for an accountant.
Privacy and credibility
A company’s name, directors and registered address are public. Some clients and large organisations prefer to deal with limited companies, and some contracts require it. A sole trader’s details are not on a public register, although you may choose to publish them.
Taking money out
A sole trader simply draws what they need. A company director must follow rules: usually a small salary, with dividends paid from profits after tax. See how to pay yourself.
When to consider switching
- Profits are rising and the tax saving from a company is bigger than its extra cost.
- You need limited liability, or clients ask for a company.
- You want to hold back profit in the business for later.
Switching has tax consequences, so get advice first.
Making Tax Digital
Making Tax Digital for Income Tax applies to sole traders and landlords. Limited companies follow different rules. See Making Tax Digital software if it could apply to you.
How AvrioBooks helps
AvrioBooks supports both. Choose sole proprietor or company when you create your business, and the chart of accounts, tax rates and reports follow. If you switch later, your history is kept. See accounting software for contractors.
Frequently asked questions
Is it better to be a sole trader or a limited company?
It depends on your profit, risk, clients and how you want to take money out. Sole trader is simpler. A company can save tax at higher profits and limits liability.
What are the corporation tax rates?
Currently 19% on profits up to £50,000 and 25% on profits above £250,000, with marginal relief in between. Check GOV.UK for current rates.
Can I switch from sole trader to limited company later?
Yes, but it has tax and admin consequences, so take advice first.
Does AvrioBooks work for both?
Yes. You can set up your business as a sole proprietor or a company.
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